This Quarterly Report on Form 10-Q includes forward-looking statements that are not statements of historical fact, and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "likely," "will," "would," or similar expressions, we are making forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully the section captioned "Risk Factors" in

Overview

Company Background

We are a leading supplier of equipment used in the global papermaking and paper recycling industries and are also a manufacturer of granules made from papermaking byproducts. Our continuing operations are comprised of one reportable operating segment: Pulp and Papermaking Systems (Papermaking Systems), and a separate product line, Fiber-based Products, reported in Other Business. Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the global papermaking and paper recycling industries. We have a large customer base that includes most of the world's major paper manufacturers. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business, and which have traditionally been less susceptible to the cyclical trends in the paper industry.

Through our Fiber-based Products line, we manufacture and sell granules derived from pulp fiber for use as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.

In addition, prior to its sale in 2005, our Kadant Composites LLC subsidiary (Composites LLC) operated a composite building products business, which is presented as a discontinued operation in the accompanying condensed consolidated financial statements.

We were incorporated in Delaware in November 1991. On July 12, 2001, we changed our name to Kadant Inc. from Thermo Fibertek Inc. Our common stock is listed on the New York Stock Exchange, where it trades under the symbol "KAI."

Papermaking Systems Segment

Our Papermaking Systems segment designs and manufactures stock-preparation systems and equipment, fluid-handling systems and equipment, paper machine accessory equipment, and water-management systems primarily for the paper and paper recycling industries. Our principal products include:

- Stock-preparation systems and equipment: custom-engineered systems and equipment, as well as standard individual components, for pulping, de-inking, screening, cleaning, and refining recycled and virgin fibers for preparation for entry into the paper machine during the production of recycled paper;

- Fluid handling systems and equipment: rotary joints, precision unions, steam and condensate systems, components, and controls used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles and food;

- Paper machine accessory equipment: doctoring systems and related consumables that continuously clean papermaking rolls to keep paper machines running efficiently; doctor blades made of a variety of materials to perform functions

Overview (continued)

including cleaning, creping, web removal, and application of coatings; and profiling systems that control moisture, web curl, and gloss during paper production; and

- Water-management systems: systems and equipment used to continuously clean paper machine fabrics, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse.

Other Business

Our other business consists of our Fiber-based Products business that produces biodegradable, absorbent granules from papermaking byproducts for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.

Discontinued Operation

In 2005, Composites LLC sold substantially all of its assets to LDI Composites Co. Under the terms of the asset purchase agreement, Composites LLC retained certain liabilities associated with the operation of the business prior to the sale, including the warranty obligations associated with products manufactured prior to the sale date. Composites LLC retained all of the cash proceeds received from the asset sale and continued to administer and pay warranty claims from the sale proceeds into the third quarter of 2007. On September 30, 2007, Composites LLC announced that it no longer had sufficient funds to honor warranty claims, was unable to pay or process warranty claims, and ceased doing business.

Through the sale date of October 21, 2005, Composites LLC offered a standard limited warranty to the owners of its decking and roofing products, limited to repair or replacement of the defective product or a refund of the original purchase price. As of July 4, 2009, the accrued warranty costs associated with the composites business were $2.1 million, which represents the low end of the estimated range of warranty reserve required based on the level of claims received. Composites LLC has calculated that the total potential warranty cost ranges from $2.1 million to approximately $13.1 million. The high end of the range represents the estimated maximum level of warranty claims remaining based on the total sales of the products under warranty. Composites LLC will continue to record adjustments to accrued warranty costs to reflect the minimum amount of the potential range of loss for products under warranty based on judgments known to be entered against it in litigation, if any.

All activity related to this business is classified in the results of the discontinued operation in the accompanying condensed consolidated financial statements.

Composites LLC's inability to pay or process warranty claims has exposed us to greater risks associated with litigation. For more information regarding our current litigation arising from these claims, see Part II, Item 1, "Legal Proceedings," and Part II, Item 1A, "Risk Factors".

International Sales

During the first six months of both 2009 and 2008, approximately 60% of our sales were to customers outside the United States, principally in Asia and Europe. We generally seek to charge our customers in the same currency in which our operating costs are incurred. However, our financial performance and competitive position can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency exchange contracts. We may enter into forward contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. These contracts hedge transactions principally denominated in U.S. dollars.

Application of Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions.

Overview (continued)

Critical accounting policies are defined as those that reflect significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, upon which our financial condition depends and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part I, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 3, 2009, filed with the Securities and Exchange Commission (SEC). There have been no material changes to these critical accounting policies since fiscal year-end 2008 that warrant disclosure.

Industry and Business Outlook

Our products are primarily sold to the global pulp and paper industry. The worldwide economic downturn continues to negatively impact paper producers. In response to the economic slowdown, paper producers have taken numerous steps to control operating costs including closing factories, increasing downtime at paper mills, deferring maintenance and upgrades, and delaying or canceling projects. Revenues in all of our product lines within our papermaking systems segment in the first six months of 2009 were negatively impacted, which resulted in a $63.7 million, or 37%, decrease in revenues in this segment in the first six months of 2009 compared to the first six months of 2008. A significant factor contributing to this decrease was the slowdown in China, where there is more linerboard capacity than needed to meet demand. There were also significant declines in North America, where paper companies have curtailed production, closed mills and shut down paper machines. In addition, fluid-handling revenues declined significantly, partly due to lower energy costs.

In response to this difficult environment, we have taken a number of steps to optimize our business structure and maximize internal efficiencies, which include integrating multiple operations in a region, merging our sales teams in certain markets, and reducing the number of employees in certain locations. In addition, we continue to concentrate our efforts on several initiatives intended to improve our operating results, including: increasing aftermarket sales, delivering products and technical solutions that provide our customers with a good return on their investments through energy-savings and fiber-yield improvements, penetrating existing markets where we see opportunity, and increasing our use of low-cost manufacturing bases. We also continue to focus our efforts on managing our operating costs, capital expenditures, and working capital.

For 2009, we expect GAAP (generally accepted accounting principles) revenues and earnings per share from continuing operations, which exclude the results from our discontinued operation, as follows: For the third quarter of 2009, we expect to report a diluted loss per share of $.28 to $.30 from continuing operations, on revenues of $46 to $48 million. This includes $.14 of incremental tax provision and $.04 of estimated restructuring costs. For 2009, we expect to report a diluted loss per share of $.60 to $.65 from continuing operations, on revenues of $210 to $220 million, revised from our previous guidance of diluted loss per share of $.55 to $.65, on revenues of $220 to $230 million. The full year guidance includes $.37 of incremental tax provision and $.15 of estimated restructuring costs. The incremental tax provision is associated with the valuation allowance established for certain U.S. and foreign deferred tax assets as a result of our cumulative loss position in the U.S. and certain foreign tax jurisdictions.

                                  KADANT INC.

Results of Operations

Second Quarter 2009 Compared With Second Quarter 2008

The following table sets forth our unaudited condensed consolidated statement of
operations expressed as a percentage of total revenues from continuing
operations for the second fiscal quarters of 2009 and 2008. The results of
operations for the fiscal quarter ended July 4, 2009 are not necessarily
indicative of the results to be expected for the full fiscal year.

                                                                     Three Months Ended
                                                                  July 4,            June 28,
                                                                     2009                2008

Revenues                                                              100 %               100 %

Costs and Operating Expenses:
Cost of revenues                                                       59                  58
Selling, general, and administrative expenses                          38                  29
Research and development expenses                                       3                   2
Restructuring costs                                                     2                   -
                                                                      102                  89

Operating (Loss) Income                                                (2 )                11

Interest Income                                                         -                   1
Interest Expense                                                       (1 )                (1 )

(Loss) Income from Continuing Operations Before Income Tax
(Benefit) Provision                                                    (3 )                11
Income Tax (Benefit) Provision                                         (1 )                 4

(Loss) Income from Continuing Operations                               (2 )                 7
Loss from Discontinued Operation                                        -                   -

Net (Loss) Income                                                      (2 )%                7 %

Revenues

Revenues decreased to $50.1 million in the second quarter of 2009 from $92.4 million in the second quarter of 2008, a decrease of $42.3 million, or 46%. Revenues in the second quarter of 2009 include a $4.2 million, or 5%, decrease from the unfavorable effects of currency translation. Excluding the effects of currency translation, revenues decreased $38.1 million, or 41%, in the second quarter of 2009 due to a decrease in revenues in all of our major product lines as our customers continued to take steps to control operating costs including increasing downtime at paper mills and delaying or canceling projects. Excluding the effects of currency translation, the largest revenue declines in the second quarter of 2009 were in our stock-preparation equipment product line, which decreased $20.0 million, or 54%, and our fluid-handling product line, which decreased $11.5 million, or 41%.

                                  KADANT INC.

Results of Operations (continued)

Revenues for the second quarters of 2009 and 2008 from our Papermaking Systems
segment and our other businesses are as follows:

                         Three Months Ended
                         July 4,      June 28,
(In thousands)              2009          2008

Revenues:
Papermaking Systems   $   47,995     $  90,453
Other Business             2,137         1,953
                      $   50,132     $  92,406

Papermaking Systems Segment. Revenues at the Papermaking Systems segment decreased to $48.0 million in the second quarter of 2009 from $90.4 million in the second quarter of 2008, a decrease of $42.4 million, or 47%. Revenues in the 2009 period include a $4.2 million, or 5%, decrease from the unfavorable effects of currency translation.

Other Business. Revenues from the Fiber-based Products business increased $0.1 million, or 9%, to $2.1 million in the second quarter of 2009 from $2.0 million in the second quarter of 2008 primarily due to stronger sales of Biodac™, our line of biodegradable granular products.

The following table presents revenues at the Papermaking Systems segment by product line, the changes in revenues by product line between the second quarters of 2009 and 2008, and the changes in revenues by product line between the second quarters of 2009 and 2008 excluding the effect of currency translation. The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP measure. We believe this non-GAAP measure helps investors gain a better understanding of our underlying operations, consistent with how our management measures and forecasts our performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

                                                                                Decrease
                                                                               Excluding
                                  Three Months Ended                           Effect of
                                July 4,         June 28,                        Currency
(In millions)                      2009             2008      Decrease       Translation

Product Line:
Stock-Preparation Equipment   $    16.4       $     37.3     $   (20.9 )   $       (20.0 )
Fluid-Handling                     15.1             28.0         (12.9 )           (11.5 )
Accessories                        10.9             16.8          (5.9 )            (4.6 )
Water-Management                    5.2              7.7          (2.5 )            (2.0 )
Other                               0.4              0.6          (0.2 )            (0.1 )
                              $    48.0       $     90.4     $   (42.4 )   $       (38.2 )

Revenues from the segment's stock-preparation equipment product line decreased $20.9 million, or 56%, in the second quarter of 2009 compared to the second quarter of 2008, including a $0.9 million, or 2%, decrease from the unfavorable effect of currency translation. Excluding the effect of currency translation, revenues from the segment's stock preparation equipment product line decreased $20.0 million, or 54%, primarily due to an $8.1 million, or 56%, decrease in stock-preparation equipment sales in North America, a $7.1 million, or 65%, decrease in stock-preparation equipment sales in China, and a $4.8 million, or 41%, decrease in stock-preparation equipment sales in Europe. These significant decreases were due to a reduction in orders as major manufacturers cancelled or postponed projects due to the current economic environment. We expect to continue to see declines in stock-preparation equipment sales in the third quarter of 2009.

Results of Operations (continued)

Revenues from the segment's fluid-handling product line decreased $12.9 million, or 46%, in the second quarter of 2009 compared to the second quarter of 2008, including a $1.4 million, or 5%, decrease from the unfavorable effect of currency translation. Excluding the effect of currency translation, revenues from the segment's fluid-handling product line decreased $11.5 million, or 41%, primarily due to a decrease in revenues in Europe, and to a lesser extent, North America and China, as customers curtailed production and reduced their order volumes.

Revenues from the segment's accessories product line decreased $5.9 million, or 35%, in the second quarter of 2009 compared to the second quarter of 2008, including a $1.3 million, or 7%, decrease from the unfavorable effect of currency translation. Excluding the effect of currency translation, revenues from the segment's accessories product line decreased $4.6 million, or 28%, primarily due to decreased demand in North America and Europe due to significantly lower demand in the current economic environment.

Revenues from the segment's water-management product line decreased $2.5 million, or 33%, in the second quarter of 2009 compared to the second quarter of 2008, including a $0.5 million, or 7%, decrease from the unfavorable effect of currency translation. Excluding the effect of currency translation, revenues from the segment's water management product line decreased $2.0 million, or 26%, primarily due to a decrease in capital sales in North America.

Gross Profit Margin

Gross profit margins for the second quarters of 2009 and 2008 are as follows:

                            Three Months Ended
                         July 4,           June 28,
                            2009               2008

Gross Profit Margin:
Papermaking Systems           41 %               42 %
Other Business                45                 29
                              41 %               42 %

Gross profit margin decreased to 41% in the second quarter of 2009 from 42% in the second quarter of 2008.

Papermaking Systems Segment. The gross profit margin in the Papermaking Systems segment decreased to 41% in the second quarter of 2009 from 42% in the second quarter of 2008. This decrease was primarily due to lower margins in our water-management product line due to the underabsorption of overhead costs given reduced order volumes. We are in the process of consolidating our water-management manufacturing facility into our facilities in Massachusetts and Mexico and we expect to continue to see reduced margins in this product line until this consolidation is completed in the fourth quarter of 2009. In addition, an increase in the gross profit margin in our stock preparation equipment product line due to a more favorable product mix and cost reductions was offset by decreases in the gross profit margins in our fluid handling and accessories product lines.

Other Business. The gross profit margin in our Fiber-based Products business increased to 45% in the second quarter of 2009 from 29% in the second quarter of 2008 primarily due to the lower cost of natural gas.

Operating Expenses

Selling, general, and administrative expenses as a percentage of revenues increased to 38% in the second quarter of 2009 from 29% in the second quarter of 2008. Selling, general, and administrative expenses decreased $7.7 million, or 29%, to $19.2 million in the second quarter of 2009 from $26.9 million in the second quarter of 2008. This decrease includes a $1.5 million decrease from the favorable effect of foreign currency translation and a $6.2 million net decrease primarily due to expense reductions throughout the Company, including our recent restructuring efforts that reduced the number of employees and merged our sales forces in certain markets.

Results of Operations (continued)

Total stock-based compensation expense was $0.6 million and $0.8 million in the second quarters of 2009 and 2008, respectively, and is included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of operations. As of July 4, 2009, unrecognized compensation cost related to restricted stock units was approximately $2.4 million, which will be recognized over a weighted average period of 1.4 years.

Research and development expenses increased $0.2 million to $1.7 million in the second quarter of 2009 compared to $1.5 million in the second quarter of 2008 and represented 3% and 2% of revenues in the second quarter of 2009 and 2008, respectively.

Restructuring Costs

We recorded restructuring costs of $1.0 million in the second quarter of 2009, consisting of severance and associated charges primarily related to the reduction of 35 full-time positions in the U.S., Europe, and China in the Papermaking Systems segment. We estimate annualized savings of $1.4 million in cost of revenues and $1.0 million in selling, general, and administrative expenses from the 2009 restructuring actions. We expect to incur an additional $1.0 million in restructuring costs during the remainder of 2009.

Interest Income

Interest income decreased $0.4 million, or 82%, to $0.1 million in the second quarter of 2009 from $0.5 million in the second quarter of 2008 due to lower average interest rates and, to a lesser extent, lower average invested balances in the 2009 period.

Interest Expense

Interest expense decreased $0.1 million, or 21%, to $0.5 million in the second quarter of 2009 from $0.6 million in the second quarter of 2008 primarily due to lower average borrowing rates and to a lesser extent, lower average outstanding borrowings during the second quarter of 2009 compared to the second quarter of 2008.

Income Tax (Benefit) Provision

Our income tax benefit of $0.4 million in the second quarter of 2009 was primarily due to tax benefits associated with our foreign operations.

(Loss) Income from Continuing Operations

Loss from continuing operations was $1.2 million in the second quarter of 2009 compared to income from continuing operations of $7.0 million in the second quarter of 2008. The decrease in the 2009 period was primarily due to a decrease in operating income of $11.3 million (see Revenues, Gross Profit Margin, and Operating Expenses discussed above).

Loss from Discontinued Operation

Loss from the discontinued operation was $5 thousand in both the second quarters of 2009 and 2008.

As of July 4, 2009, the accrued warranty costs associated with the composites business were $2.1 million, which represents the low end of the estimated range of warranty reserve required based on the level of claims received. Composites LLC has calculated that the total potential warranty cost ranges from $2.1 million to approximately $13.1 million. The high end of the range represents the estimated maximum level of warranty claims remaining based on the total sales of the products under warranty.

Results of Operations (continued)

Composites LLC retained all of the cash proceeds received from the asset sale in October 2005 and continued to administer and pay warranty claims from the sale proceeds into the third quarter of 2007. On September 30, 2007, Composites LLC announced that it no longer had sufficient funds to honor warranty claims, was unable to pay or process warranty claims, and ceased doing business. Composites . . .